Today’s macropocalypse is a shockwave of crises – and the venture economy is responsible for one. This is no mere recession, driven simply by irrational exuberance on Wall St. In fact, Wall St unleashed only the last horseman of the macropocalypse – a financial crisis. But it was preceded by what venture capitalists unleashed a decade ago: an innovation crisis.

Wall St’s financial crisis has a mirror image: Silicon Valley’s innovation crisis. Both are playing a crucial role in driving the economy to breakdown.

Why does President-elect Obama have to invest a likely trillion dollars to renew, well, pretty much the entire industrial base of the economy – to seed new auto, energy healthcare, education, finance, and agricultural industries (to name just a few)? Because today’s crop of apathetic, risk-averse venture investors didn’t.

The venture economy is failing investors, entrepreneurs, the economy, and society. Sound harsh? Think again. Here’s how pervasive the venture economy’s failure is: Detroit’s dying – but we don’t have a better auto industry, let alone better energy to power it. Education is failing – but we don’t have a more productive system of schools and universities. Healthcare is going down the tubes – but venture investors are partying like its 1969, still focused on blockbuster drugs instead of structural reinvention.

I could go on, but discussing the problems in finance, media, marketing, telecoms, food, housing, and apparel would be beating a (very) dead horse. So here’s the point. The hallmark of a failing bank is toxic debt. The flipside is true in venture: the hallmark of a failing venture economy is a significant amount of perpetually uninvested cash, with investment shifting to later and later stages: a clear sign of that venture investors are struggling to, well, make much of an economic difference, much less be disruptive.

Wall St’s moral hazard has a mirror image.. The perverse irony of the collapse of industrial-era capitalism isn’t just that Wall St ended up being massively risk seeking, taking bets it never should have. It’s also that venture capitalists ended up being risk averse – never making the bets they should have.

See the point? Both are flip sides of the same coin of moral hazard. Left unmonitored, thinly regulated, opaque, unaccountable, myopic, and cronied to the max, Wall St was free to take hidden action that maximized it’s near term profits – overinvesting in toxic securities. For all the same reasons, venture investors have been free to take hidden action that maximizes their own near term returns – underinvesting in radical innovation.

And that’s a really, really big problem not just for geeks, but for us all. Why?

The venture economy puts the creation in creative destruction. The value equation of capitalism is simple: creative destruction. So venture plays a vital macroeconomic role: to create the industries, markets, and categories of tomorrow, unlocking new productivity from stale resources and assets.

Why has the US been the world’s most productive economy for so long? In large part, because it was home to the world’s only real functioning venture economy, which churned out new markets and industries like IT and biotech.

Just like Wall St underinvested in destruction, Sand Hill Rd underinvested in creation. Wall St was negligent at the task of economic destruction: it failed at monitoring, checking, and allocating capital not just to a few companies, but entire industries (like housing, banking, and autos). So industries long past their sell-by date weren’t disciplined, much less destroyed.

But the little-discussed converse is also true: venture investors have systematically underinvested in economic creation. Here’s a simple question. How many new industries or markets have venture funds created in the last decade? By my count, exactly two (search and cleantech – and cleantech is still a maybe). Sure, that number might be low by a few percent – but not by an order of magnitude, which is what putting the creation back in creative destruction demands.

The lack of new industries, markets, and categories is the great accelerator of the macropocalypse. If we had tomorrow’s industries primed and ready to pump new value into the economy’s failing arteries, today’s growing macropocalypse would have just been recession as usual. But we don’t, because today’s venture investors didn’t seed tomorrow’s industries and markets yesterday – and that loss of potential is the single biggest accelerator that’s turning financial meltdown into economic breakdown.

Imitation – not innovation – is woven into the fabric of the 20th century venture economy. Why are venture investors failing to seed new industries and markets? Because venture funds invest not just in all the wrong places, ignoring clear supply and demand signals – but, worse, in all the wrong and same places. Where one pioneer invests, a slew of imitators follow, and so tremendous amounts of cash are poured into the same business design or market space – ad exchanges, social networks, and blogging/vlogging platforms to name just a few recent fads. That striking homogeneity reflects an almost total lack of strategic imagination by venture players.

Sound familiar? It should: it’s just like any other lazy, moribund, oligopolistic industry bereft of the incentive for innovation. Except in the case of venture capital, the dulling of incentives causes a persistent structural misallocation of venture capital itself.

A 21st century venture economy needs new DNA. How can venture investors put the creation back into creative destruction? By renewing their stale DNA: learning to play by the new rules of 21st century organization and management.

That means shifting from closed to open: investing in new industries and markets demands a more global perspective, people from radically more diverse backgrounds, and authentically different voices that come from outside the old-boy network.

It also demands wiring failure into the venture value chain, to recreate the incentive for innovation, and minimize the incentives for imitation, gamesmanship, and cronyism.

Finally, it needs to be more participative: transparency, disclosure, and discussion are the only ways to create more productive interactions between VCs, LPs, entrepreneurs, and portfolio companies.

Unfortunately, today’s venture investors are about as interested in reform as yesterday’s bankers were. So it just might take a venture crash – just like Wall St’s financial crash – to wake up the guys and gals asleep at the wheel of creative destruction.

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